Wednesday, November 10, 2010



As many of you know, one of my various jobs is that of college instructor at various institutions of higher learning in the Chicagoland area. I am teaching three investment related classes this semester and require my students to subscribe to the Wall Street Journal and point out to them articles that I think are especially relevant to topics we discuss in class. When one of those “Read this article” missives is especially interesting, I like to share it with my readers. The below note qualifies.



The day after we discussed such financial machinations in the MBA class, today’s Wall Street Journal (Wednesday, 11/10/10, page C1) reports that HCA is borrowing $1.5 billion in the junk market to pay its private equity owners, including KKR and Bain Capital, a dividend of $2.0 billion. This is on top of $2.25 billion HCA has already paid in dividends, bringing total dividends just $1.25 billion short of the $5.5 billion HCA’s owners have put into the company. Nice work if you can get it.

The junk deal will be done at the holding company level and is therefore structurally subordinated to operating company debt, and is, to use a term that I have perhaps just made up, lightly covenanted. The deal will probably be priced on Wednesday and demand is brisk at a projected coupon of 7.75%, which, admittedly, in this rate environment is an eye-popping spread, but which does not necessarily make the deal cheap. So far this year, according to S&P, companies, primarily junk rated companies, have borrowed $40.3 billion in “dividend related financing loans and bonds.”

I was privileged and blessed as a young man to have worked for one of the great leaders and true gentlemen in the junk bond market and in the investment world in general. His name was Bill Buecking and he was a wise manager of both money and people with a perspective on the markets and life that his young minions, and especially one of his young minions, were a long way from acquiring. I am reminded of him when I look at deals like this HCA issue. Whenever we would bring a deal that stretched (broke in some cases) formerly established boundaries for prudence in the market to Bill for his review, he would listen to our presentations, read the documents, shake his head, and say “We’ve come a long way, haven’t we?” The only good thing about deals like this, in my opinion, is that they remind me of Bill’s wisdom.

As I said in my missive yesterday, and as we discussed in the MBA class, this high yield market looks bubblier than a whole pack of Bazooka gum. But I would have thought that last year and would have missed all the froth generated in the subsequent period. A little humility (believe it or not) is a prerequisite for long term success in investing.

Also in today’s Journal, and also on page C1, is an article that points out the risks to the municipal bond market of cities’ deciding they simply don’t want to make good on guarantees of their special use debt, much like homeowners’ deciding that the rules of finance don’t apply to them and therefore there is no ethical barrier to simply walking away from underwater real estate loans.


No comments: